A giant leap back for risk sentiment

Markets

Global markets have taken a giant leap back in the last few hours as investors seek to quantify the fallout from the coronavirus outbreak. While there has been some positive news out of China, with the number of daily new cases declining over last week, concerns about the reliability of the data remain, and the death toll sadly keeps on rising. Overseas infections have started to pick up, and there are now the genuine questions of the extent to which the virus can be contained, which opens up a whole new can of worms for the sooner than later global growth rebound trade.

Currency Markets

The Yuan Asia key risk barometer

I think a combination of factors that drove todays risk-off performance:

1) lack of further improvement of the domestic coronavirus situation - the number of daily new cases has dropped over last week but seems to have flatlined while the death rate remains sticky, and the pace of the economy returning to normal is slower than expected

2) many had somehow thought they priced in the economic impact but those guestimates are now proving overly optimistic with the Apple statement and the WTO warning overnight.

3) pricing appeared too stretched towards the overly optimistic side, making a short dollar and long Asia FX risk vulnerable at the current levels.

Ultimately this risk-off move may have legs after USDCNH raced through 7.00 with ease.

USDCNH climbed higher in tandem with the broad risk aversion and the higher dollar. In general, the USD was bought broadly across ASEAN FX. I've been alluding to the million-dollar question about uncertainty around the supply chain dynamics as a result of Covid-19. But it's now becoming the 500-million-person certainty (number of persons affected by China's containment efforts) that some significant damage has been done to both supply chains and China's consumption.

The Malaysian Ringgit

We knew it was going to be a bad day for the Ringgit but with Malaysia's strong trade ties with China and signs of a burgeoning supply chain disruption, the Ringgit had no place but to go lower as risk-off sentiment continues to grip the region.

The RBA

The RBA's February minutes suggest that despite optimistic forecasts, the bushfires and coronavirus present a significant short-term risk to the economy. The case for easing "rested largely on the only gradual progress towards the bank's inflation and unemployment goals," which was like pouring salt in the Aussie wounds as the A$ was suffering from the Covid -19 economic knock-on effects out of the gate this morning.

ASEAN Central Banks

While adding to the laundry list of concerns, there are nascent signs that policymakers are considering interest rate cuts to stimulate economies that have been weakened by the coronavirus outbreak. South Korea, Thailand and the Philippines central bank are now signing from the same dovish song page. While the market expects the Singapore budget to realize the mother of all stimulus packages to support the flagging Singaporean economy (3 PM Local time)

Gold Markets

Gold's strong inverse correlation with equities suggests global investors remain quite hypersensitive to fluctuations in risk despite a strong dollar also competing for safe-haven flows. The sell-off in equity markets will likely drive gold demand over the short term. And as more and more companies report supply chain concerns, gold prices should respond accordingly higher. Bid on dip mentality should reign supreme, and the market should continue to look for opportunistic buying opportunities but a break of key psychological $1600 level appears on the cards much sooner than later.

Oil Markets

Oil is holding up better than some would have expected, given the hostile risk-off move in Asia. But the worse things get the greater the prospect of an OPEC+ call to action to support oil prices intensifies leaving oil speculators in a bit of dichotomy.

However, with a reality check about to set in when the regional high-frequency data starts to roll in, and in the absence of the Russian compliance commitment, any excuse to sell still feels like the sentiment in the market right now.